Specifically, you're misinterpreting what is meant by "an excess of overcaution". Felix is referring to how investor demand being too cautious (i.e. only interested in or able to invest in AAA) lead to a scenario where all sorts of tricks were developed to get an AAA rating on securities [1].
1. http://blogs.reuters.com/felix-salmon/2009/08/26/shrinking-b...
Unfortunately the chart only goes back to 1990, and I don't have time to dig up historical figures. Perhaps more financial instruments used to enjoy a AAA rating until the Savings & Loan scandal of the late 80s, and the sudden upward jump in ratings represents the purging of bad assets from the financial system following the recession of the early 90s. But really, I don't know. Without disputing your observations above, I think we could learn a lot from looking at the largest discontinuity here rather than focusing on the absolute volume figures from recent years, notwithstanding the significant increase in securitization following the repeal of Glass-Steagall.
A lot of the AAA growth from 1990 forward comes from the application of these structures to securitization of non-mortgage consumer loans, first auto and credit card loans, then others.
Proliferation of "credit enhancements" certainly did spark the AAA bubble, but I'm quite certain that participating financial institutions became much more profitable under this new regulatory regime.
Specifically, the deregulation of OTC derivatives[1] in 2000, which allowed issuers to purchase insurance against loss, caused massive growth in AAA ratings for ABS (dark purple section). In fact, there is an excellent Frontline piece on the story[2].
[1] http://en.wikipedia.org/wiki/Commodity_Futures_Modernization...
One other factor (from the early 90's, I think), was when getting asset sale treatment for GAAP and RAP (bank regulatory accounting) while still getting debt for tax treatment become standardized. That was a breakthrough.
Interestingly, there's now the question of whether the US debt should be rated AAA : Is there more than a 1-in-100 chance that the two sides can't get to some compromise (or, more likely, agree on how to kludge things) by September?
AAA is meant to lead to default at a 1-in-10000 per annum rate (it's a standardized measure). So, by that argument, USA downgrade should have already occurred.
And, since companies cannot be rated higher than the countries that they're in, that would lead to the immediate downgrade of Microsoft, etc...
There's no such rule. In fact, Japanese companies have been rated higher than Japanese sovereign debt.
http://www.bloomberg.com/news/2011-01-27/toyota-canon-rating...
You seem to be jumping from one conclusion to another which much reasoning to link them, and then drawing another conclusion from that.
http://finance.yahoo.com/q/bc?s=JNK&t=2y&l=on&z=...
...notice that the 20 year treasury is more volatile than junk bonds.
More apt comparison would be intermediate treasuries, much different picture (time frame also questionable for a pure comparison):
http://etfdb.com/etf/JNK/fundamentals/ http://etfdb.com/etf/IEF/fundamentals/
http://www.moodys.com/sites/products/AboutMoodysRatingsAttac...
NIIP is interesting. Despite the US's huge debt, they have a reasonable NIIP of about -25% (I think). So the money is mostly there. It's mostly in private hands, but as long as the private sector is OK, the government will keep collecting taxes.
The obvious problems with the US are its health system (more public funding than countries with free health, but terrible value for money), its military deployments (the military can be an OK if they use it to drive high-tech growth, but actually deploying it very expensive), its prison system (they tend to lock criminals up for a little too long, and they have way too much crime for other reasons).
The problem, which started becoming visible in 2001, is that in the aftermath of the "dot-com boom", the ratings agencies starting rating a lot of things AAA that were not, in fact, AAA. That is not "an excess of overcaution". In fact it was an exploit of the banking/finance system, that went like this:
And the far right side of the chart is just a continuance of the same thing: our shit fell apart, what should we do? Well, the easiest thing is to bribe the politicians to take our private debts and turn them into public debts. And so it happened. That big tall lavender bar in 2009 is the dark purple lines from a few years prior....None of this has anything to do with an excess of caution or with AAA debt being more systemically dangerous than other types of debt. The blogger here almost grasps what is wrong:
> "That’s possibly the most horrifying bit of all: it simply defies credulity for anybody to be asked to believe that more than half the bonds issued in any given year are essentially free of any credit risk."
but he skips past the correct answer, which is that the ratings agencies have been suborned.